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Analysts: Iran’s subsidy reform could jump prices by up to 40 percent

Analysts: Iran's subsidy reform could jump prices by up to 40 percentReuters – Iran is to start slashing government subsidies later this year, a gamble for President Mahmoud Ahmadinejad who hopes to save the state billions and stimulate the economy, but risks inflation and unrest.

Below are some questions and answers on the subsidy debate:

WHAT IS THE HISTORICAL BACKGROUND?

Overhauling Iran's generous subsidy system — a hangover from the times of the war with Iraq in the 1980s — has been under discussion for years, but popular and political resistance has repeatedly stalled attempts at reform.

Gasoline rationing was introduced in 2007 as the first step towards reforming the system. Though it provoked riots in Tehran, the plan went ahead.

Parliament approved the subsidy reform bill last October but arguments with the executive over its impact delayed its introduction from March to the second half of the Iranian year six months later.

HOW DOES THIS PLAY INTO SANCTIONS THREAT?

By reducing demand for gasoline, Iran could be less vulnerable to any new U.N. sanctions on imports over Tehran's disputed nuclear energy programme, which Washington says is a front for building weapons, something Tehran denies.

Iran imports around a third of its gasoline consumption needs due to lack of refining capacity.

The International Monetary Fund says gasoline demand has increased 9 percent per year, twice as fast as per capita income. Increasing prices should encourage energy efficiency and the development of environmentally friendlier alternatives, it says.

HOW BIG ARE SUBSIDIES?

Subsidies covering gasoline and other refined products, natural gas, electricity, water and basic foodstuffs cost Iran around $100 billion a year and equal around 30 percent of GDP.

WHAT DOES THE REFORM LAW DO?

It will cut the subsidies for all of those products, except flour and bread, for retail consumers and industry.

Cash payments to poorer Iranians will help them pay the higher prices. Companies will have access to subsidies loans.

The idea is to move towards free market prices in the five-year period to 2015.

The first phase of the reform will cut $20 billion in subsidies during the six-months from September.

WHAT HAPPENS TO THE SAVINGS?

Analysts say around 50 percent is for cash handouts, 30 percent will be made available to industries in the form of loans, and 20 percent will be used to create a social security safety net.

HOW WILL THE CASH HANDOUTS WORK?

An Iran analyst at Middle East consultancy BEDigest.com said 60 million of Iran's 72 million population had registered for eligibility for cash handouts. Whether they get them, and how much, will depend on households' financial circumstances.

The analyst said Ahmadinejad has suggested average families could receive $50 per person per month. Average per capita income is around $1,000, he said.

WHAT ARE THE RISKS?

Any huge jump in prices would hurt and could lead to a repeat of the street disturbances of 2007. Analysts say prices could jump by up to 40 percent. Official inflation is around 10 percent at present.

The cash payments system will maintain a major role for the state and could be an opportunity for corruption and clientelism.

(Reporting by Robin Pomeroy; Editing by Samia Nakhoul)